PotashCorp: an investor's guide to the fertilizer giant

A look into PotashCorp’s Potash Segment

By Jose de la Puente
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Apr 3, 2014 1:00 pm EST

Potash is the most significant product in PotashCorp’s profits, representing 56% of gross profits. 90% of PotashCorp’s potash goes to the crop industry where the most important uses are for grains, oilseeds, and fruits and vegetables. The remaining 10% goes to the feed and industrial market. Furthermore, almost 2/3 of potash sales during 2013 were made offshore, principally in Latin America and Asia.

The Potash Market – high margins

With few participants in the potash industry, companies can, to some extent, support potash prices by cutting supply. This is referred to as an oligopoly. For this reason, potash is the most profitable product in the fertilizer industry with gross margins of 58%. As one of the largest producers of potash, production cuts at PotashCorp can have large influence over industry prices.

Over the past year, the companies in the industry have been severely hit mainly due to lower fertilizer prices. When the break-up of the Uralkali-Beluraskali,relationship, two of the biggest potash producers, was announced, potash-related shares went down by more than 20% fearing decreasing prices of potash due to higher supply. In 2012, PotashCorp suffered much lower sales volumes, while in 2013 the declining price of potash price caused revenues, and margins, to decrease further.

In general, the largest determinant of higher net sale price are the freight costs. Mosaic (MOS) and Potash Corp (POT) have similar selling prices because both of them produce in Canada. However, Intrepid Potash (IPI) produces in the U.S. and therefore its freight costs are lower due to proximity to clients increasing this way net sale prices.

What is the cost of producing potash?

Potash is a simpler product compared to nitrogen and phosphate. The cost of production, or cost of goods sold, mainly comes from the cost of utilizing the production facilities and labor as instead of raw materials. The company has also announced initiatives to reduce costs through new low-cost production facilities expected to start operations between 2014 and 2016.

PotashCorp has the lowest cash COGS between all of its American peers. Intrepid Potash (IPI), for example has a cash COGS that ranges in the higher part of the cost curve due to fewer economies of scale and less advantageous positioning.

What will happen to potash?

At the beginning of the year, a deal with the Chinese was announced, setting grounds for a price floor for potash. Furthermore, there have been reports of possibilities that Uralkali and Beluraskali would restart its relationship. Under these circumstances, the potash market, and PotashCorp, would experience favorable increasing prices and margins, but, for now, these are all rumors.